First, let
me explain how this month’s topic landed on my desk and in your email inbox
folder. I am a licensed lawyer in both Texas and New York. As such, my clients
come from a diverse geographic area. Property owners, tenants, landlords,
developers, brokers, agents and property managers in New York have a different
view of The Way Things Work then we do in Texas.
Some
of their differing views of TWTW relate to an obligation of good faith and fair
dealing. And, this duty (or, non-duty) then trickles down to the choice of law
clause found in virtually every Contract and Lease.
Let
me [try to] explain by using a recent case to illustrate.
Hilfiker
Square owns land in which Thrifty Payless is a tenant. Recorded covenants
prohibit construction without first obtaining 90% consent of the those who own
and those who occupy the shopping center.
In
2010 Hilfiker had an opportunity to sign a long-term ground lease with a restaurant
tenant. In 2011 Hilfiker started to request the needed consents in order to
proceed with development and leasing.
All
parties including the City agreed to the plan. But not Thrifty. Thrifty
objected to the plan for three distinct reasons – parking utilization, driveway
operations, and visibility.
Hilfiker
engaged a third-party engineering firm and a third-party architectural firm to
analyze and address these concerns. Each specialist concluded that development
would not materially impact Thrifty’s parking, driveways, or visibility.
Undaunted,
Thrifty still refused to consent. So Hilfiker sued Thrifty Payless, alleging
that Thrifty breached an implied covenant of good faith and fair dealing by
depriving Hilfiker of its opportunity to enter into the ground lease with the
restaurant-tenant. Hilfiker claims that its damages are $1.6 million, which
corresponds to the amount the ground lease area would be worth if it were
developed as projected.
Thrifty
defended by claiming that the recorded covenants grant to Thrifty the absolute
right to prevent Hilfiker from building a restaurant at Hilfiker Shopping
Center. No reasons required. Consequently, Thrifty requested that the Court
toss the case.
This
case comes to us from Salem Oregon, and so far the only portion that has been
litigated to completion is Thrifty’s request that the Court dismiss the
lawsuit.
The
Oregon Court found that Oregon law imposes a duty of good faith and fair
dealing in the performance and enforcement of every contract. The purpose,
writes the Court, is to prohibit improper behavior and ensure the parties will
refrain from any act that would have the effect of destroying or injuring the
right of the other party to receive the “fruits” of the contract.
I
suppose that Oregon contracts bear “fruit.” But that’s a digression.
From
there, it wasn’t a far stretch for the Oregon Court to conclude that Hilfiker
had a reasonable expectation that Thrifty would negotiate, reasonably and in
good faith, concerning any proposed amendments to the recorded covenants as
long as such amendments are not materially adverse to Thrifty’s financial
interest.
And
so Hilfiker’s claim withstands Thrifty’s Motion to Dismiss. See Hilfiker Square, LLC v. Thrifty Payless, Inc.,
6:16-cv-01855-MC; District Court of Oregon; November 29, 2016: https://casetext.com/case/hilfiker-square-llc-v-thrifty-payless-inc.
This
is the place where I stress that Oregon’s laws are different than those in
Texas, at least on this point. Texans don’t have a duty of good faith and fair
dealing with respect to real estate purchases, sales, leasing, management, and
development, unless that obligation is inserted into the document or unless a
special relationship exists between the parties.
But Texas real estate brokers and
agents do have a similar, implied duty!
Lessons
learned:
1. The
laws of each State (take Louisiana, as an extreme example) can be radically
different than other States. See above.
2. This
case illustrates why contracting parties need to be smart about the boilerplate
choice of law clause hidden on Page 23 of the Contract or Lease. Depending on
the clarity of your crystal ball, selecting Texas in that section may backfire.
3. The
B/L: Some “standard” Contract and Lease provisions deserve attention and
consideration. The choice of laws clause, often overlooked, might require more
scrutiny.
Stuart A. Lautin, Esq.*
* Board Certified,
Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization
Licensed in the States of Texas and New
York
Reprinted
with the permission of North Texas Commercial Association of REALTORS®, Inc.
